Dr. Edward
W. Younkins is a Professor of Accountancy and Business
Administration at Wheeling Jesuit University in West Virginia.

TURGOT ON PROGRESS
AND POLITICAL ECONOMY

by Edward W. Younkins

Anne-Robert-Jacques Turgot (1727-1781) was a major political and
intellectual figure in pre-revolutionary France. He was a man of
wide-ranging intellectual interests and is considered to be a symbol
or exemplar of the Enlightenment. A.R.J. Turgot was a well-respected
social philosopher and political economist despite having written no
books. He was a man of letters who was actively involved in pubic
life. Turgot's breadth of interest, enormous erudition, and powers
of analysis and synthesis were of the highest order.

Although Turgot's father
was a government official, his family expected the young Turgot to
enter the Church and become a priest. He enrolled in a seminary and
became an Abbé but ultimately joined the royal bureaucracy first as
a regional administrator as Intendant of Limoges and later as
Comptroller-General (i.e., Minister of Finance) of France.
Originally he was apparently destined for a clerical and academic
career, but in 1751 he decided to turn from theological to legal
studies and to enter a career in royal administration that entailed
administrative and judicial services.

Progress

Turgot had a philosophical historian's interest in social dynamics,
social change, development, evolution and progress. In his works on
philosophical history, Turgot exhibits a systematic and scientific
view of society. Two of the main sources of Turgot's ideas on history
and progress are the two public discourses he delivered in Latin at
the opening and closing of the Sorbonne in 1750 when we has 23 years
of age. To these he added his 1751 discourses on universal history and
a project on political geography. It was after these discourses in
1751 that he decided against ordination in the Church.

Turgot begins by praising
the role of divine beneficence and knowledge in human progress but
moves on to extol the qualities of human nature that lead to
advancement. He saw the Supreme Being, not as an interventionist God,
but rather as Prime Mover. Turgot viewed God, not as an immanent
Deity, but instead as a First Cause. Early on, he speaks about the
benefits of Christianity to the progress of mankind. He noted that
Christianity was the moving spirit of mankind's progress since the
fall of the Roman Empire. However, Turgot mainly discussed the secular
causes and stages of mankind's progress. His writings are a mixture of
Christianity and humanism with greater emphasis on the latter.

Turgot saw human progress
as rooted in human faculties, motivations, will, and fixed natural
law. He viewed progress as a basic law of the universe that did not
require divine intervention – man progresses under his own power.
Turgot's ideas of world history and progress lay far outside and
beyond Biblical teachings. In essence, Turgot discerned that man must
learn to adjust and to adapt to the natural laws of the universe. The
starting point for the human mind is nature as it is. Man's problem
then is to discover the fundamental principles that underpin the
workings of the world. To do this involves the study of the processes
of causation through which the past causes the present and the past
and present together cause the future. All ages are linked by a series
of causes and effects which connects the present state of the world
with all those states that have come before it. For Turgot, progress
was the inevitable consequence of historical development and, at the
same time, the creation of the human will acting with an understanding
of the past.

Turgot believed in
progress and in the perfectibility of man. The human mind, including
the exercise of reason and volition, has the potential for
progression. He predicted the future of reason and the inevitable
advancement of the human mind. He discussed man's ability to
accumulate experience by receiving impressions from the outside world,
reflect upon them, combine them, and improve upon them. For Turgot,
man is created by God, is subject to Lockean epistemology, and has the
capacity to become a civilized moral person. He saw humanity
progressing slowly but somewhat steadily toward greater perfection.
Progress is found in man's singular ability to conceptualize and store
knowledge, improving upon it, and making it available to each new
generation. Although subject to natural law, men are able to use
reason to change and reconstruct, in part, his environment. Turgot was
confident and optimistic that a knowledge of the past enables man to
build a better future.

Subscribing to Rousseau's
idea of the natural goodness of man, Turgot believes that there is a
harmony in nature. Accordingly, if men act in accordance with nature's
laws, they will observe themselves to be in harmony with other
people. He accepted the notion of enlightened self-interest and
repudiated the idea that the origins of man's actions were solely
egotistical. He saw that moral behavior was subject to improvement and
that moral progress depended upon obedience to reason and natural law,
the practice of tolerance, rational acceptance of law, recognition of
the importance of the virtues, and utility. Turgot wanted reason to
become more and more important and to diminish emotions and passions.

Turgot observed a
fundamental distinction between the physical world and the moral human
world. He sees recurrence in the physical order and progress in the
human order. He says that the idea of progress distinguished the human
order from the physical order and that men do not possess the
constancy of the physical world. According to Turgot, there is a basic
drive in human nature to create novelty and to innovate. The notion of
innovation is the basic new idea in Turgot's view of the historical
world. Mankind is distinguished by innovation, change, and progress.
For Turgot, progress is the realm of human beings and constitutes a
system of worldly morality.

Turgot developed the
four-stage theory of economic and social development from
hunter-gatherer, to pastoral, to agricultural, and finally to the
peace and prosperity of commercial or market society. Turgot employs a
stadial or evolutionary theory of development in which society
naturally progresses, evolving in a sequence of regular stages, the
last of which is the contemporary commercial world of capitalism. His
idea is of the linear progressive advancement of mankind.

Turgot explains that
there is a process through which each age inherits the social,
political, economic, educational, institutional, artistic, and other
legacies and environments of its predecessors. There is a process of
acquisition, preservation, and addition to an increasing body of
knowledge about man and his world. Turgot discusses an ever-growing
accumulation, increasing inheritance, and eternal transmission of the
world's store of knowledge as civilized man has recorded more and more
information about the complex and diverse conditions of mankind. This
progressive accumulation, augmentation with novel discoveries, and
transmission of knowledge has been made possible by language and
writing. The past is a valuable store of experience and ideas for
mankind. Knowledge and progress go together.

Men are able to
synthesize new combinations in order to develop novel ideas. An
orderly language is required as a means for the communication of such
knowledge and as a repository for the history of mankind's progress.
Such a language provides adequate symbols for displaying one's ideas
and transmitting them to future generations. Turgot viewed language as
an index that reflects the stadial development of a given nation or
region. It follows that the development of human civilization is a
history of language, writing, and symbolic communication. Symbols can
hold acquired and new ideas and transmit them socially to successive
generations.

According to Turgot, the
change process in language is vital – language should not be too rigid
and static. When languages change, they are frequently made more
expressive and flexible. New words are invented only when there are
new ideas that need to be expressed. Turgot observes that there must
be appropriate conditions of language in order for genius to ascend. A
precondition of progress is that a society be open to the spirit of
change in language as well as in many other areas.

Turgot envisioned
inexorable progress with respect to the mathematical nature of all
types of specific knowledge. His goal is to have all knowledge
expressed as mathematical symbols rather than in imprecise language
that can be colored by passion, personal prejudices, politics,
irrationality, and imagination. Turgot was looking for a body of
rational linguistic symbols and wanted to see the steady
conceptualization by man at the sacrifice of his emotional and
fanciful propensities. He valued strongly the superiority of the
abstract over the concrete.

According to Turgot,
history has demonstrated the actuality, direction, and possibility of
progress but it has also shown instances in which progress is hindered
by man's irrationality and by other factors. He notes that inherited
ideas can sometimes be obstacles to new knowledge. In addition, he
explains that human societies pass through cycles of progression and
regression. On the one hand, there is a basic drive in human nature to
create novelty and to innovate. On the other hand, there exists a
negating principle through which institutions can keep man in a
routine of repetition and sameness. Movement as a primordial force, a
preference for liberty, and a creative and critical spirit raises
societies into civilizations. However, these impulses are sometimes
hindered by conservative institutions that become impediments to
further progress. Mere repetition adds nothing to progress. World
history is thus a struggle between the desire for movement and the
proclivity toward quiescence. Turgot adds that men are sometimes led
astray but learn from their mistakes and move forward. He did not see
progress heading toward the elimination of all errors, evil, or
misery, but he did say that progress involves the overcoming of
impeding forces in physical nature, in society, and in man himself.
According to Turgot, the human spirit will always propel a society out
of stagnation. It follows that nature leads man to truth but at an
uncertain and uneven pace.

Turgot did not believe
that the Middle Ages were a totally dark period of detrimental impact
on the human mind. He said that Christianity through medieval
scholastic philosophy fostered reason and acuminated European minds.
To this he added the fact that favorable linguistic conditions were
developed during the Middle Ages which became essential for the
Renaissance to occur. He also observed that barbarism evolved into a
system of government and policies and that feudalism was at least
better than anarchy. Turgot also noted that the reawakening of
speculative science during the Renaissance had been fostered by the
introduction of mechanical inventions during the Middle Ages which
helped to diffuse scientific knowledge and to make individuals aware
of the achievements of those who came before them. He sees technology
and artisanship as a foundation for science which then brings even
newer technology and products into being and so on. Within a society,
Turgot saw technical progress, as embodied in the production
techniques of artisans, to be the most enduring and the hardest to
destroy. He also sees technical progress occurring throughout history
at a relatively stable tempo compared to other forms of progress.

Turgot explains the
importance of a "social surplus" as the means by which advances of one
stage of progress to the next were made possible. He said that the
coming of the agricultural stage of development creates a social
surplus which induces trade, tourism, the division of labor, the
useful arts, educational advances, other accomplishments, and
increased inequalities of life's conditions in different parts of the
world. All nations do not progress regularly or at the same speed.
Even at a time when most societies are declining or decaying, Turgot
proclaims that there will be some society moving forward. Although he
sees evil forces at work throughout history, Turgot is confident that
the good will win out and that mankind will continue to grow toward
perfection.

Turgot explains that
differences in the world during a given time period are due to more
than simply adaptations to climate and terrain. He criticizes theories
of purely climatic and topographical causes of the variability among
various cultures. Turgot says that these differences are better viewed
as degrees of social development. However, he does acknowledge that
geography is important as an environment for cultural and social
processes which bring about progress. There is an infinite variety of
historical conditions and circumstances (such as war, colonization,
and even chance) which affect the unequal progression of nations. It
is only natural that there are inequalities in the progress made by
different nations. Turgot also noted that the variations in history
were additive.

Turgot inquired into the
causes of cultural advancement and cultural decline and asked why
creative achievements are seldom found in history. He believed that
the causes of creative achievements were found in environments that
emphasize reason, liberty, change, mobility, and a diversity of ideas.
Welcoming energy, action, and novelty, Turgot contended that the
genius played a critical role as dynamic change agent. He was
convinced that progress was due to the achievements of the few who
were gifted with real genius. Whereas Turgot saw only small
differences in the physical abilities of men, he recognized a
substantial inequality in their mental capabilities and in the
character of their spirits.

Turgot was interested in
the contexts and factors of society that enabled genius to develop and
in the distribution in time and place of such creative individuals. He
assumes that geniuses in a given field are constantly present but that
there needs to be a cultural context in existence that makes possible
their development and appearance as creative individuals. He sees the
biological presence of superior innate powers as only the beginning in
the emergence of creative individuals.

Opportunities for
progress are always present but they need to be perceived, reflected
upon, and acted upon in order to be actualized. Turgot says that a
genius grasps novel opportunities and goes forward to articulate his
vision. He sees genius as the human moral force that moves world
history. Genius thus explains the diversity in the rate and attributes
of progress throughout time and space.

Turgot assumed that
nature was similarly productive of great minds in various historical
periods and that the more earthly inhabitants there were, the more
potential geniuses there would be. It follows that favorable
conditions in society and in politics are needed in order to promote
geniuses to their full capacity. Turgot says that the maintenance of
geniuses and the optimization of their potential is the principal
operation of the good society. He emphasizes that the accumulation of
knowledge requires freedom of inquiry and is in favor of a political
structure that promotes opportunities for liberty and spontaneous
action. He saw that free exercise of one's talents was good as long as
there was no harm to others.

Turgot witnessed an
increasing momentum of both vertical and horizontal progress. With the
broadening of communication networks, the Enlightenment was about to
bring the entire world into civilization thus safeguarding against
degeneration. Volitional men were exerting evermore greater control
over nature through technology. He saw mankind as embodying a law of
steady perfectibility.

According to Turgot,
through their actions, men gained ideas of distinction and of unity.
Although Turgot embraces boundless diversity, he explains that
everything in nature is linked together despite the differences. All
aspects of the universe are interconnected. Metaphysically, there is
one universe in which every entity is related in some way to all the
others. No aspect of the total can exist apart from the total. All
entities are related through the inexorable laws of cause and effect.
No concrete existent is totally isolated without cause and effect.
Each entity potentially affects and may be affected by the others. As
inhabitants of the universe, each person is linked via cause and
effect, to everything that exists. It follows that all true knowledge
is interrelated and interconnected, properly reflecting a unified
whole that is the universe.

Man develops his potential by accumulating and adding to the
knowledge of past generations. Such knowledge expands and
accumulates when it is stored in books and other media for the use
of future generations. Inventions – from writing to the computer –
have been important devices for sorting and recalling accumulated
knowledge.

Advances build on
progressive developments of knowledge in the past. Whenever we
discover something new, that new knowledge is necessarily related
to principles that men already knew. Any given item of knowledge
requires a prior context of knowledge in order to be grasped by a
human being. In turn, that prior context of knowledge is related
to another previous context of knowledge, and so on back in time.
Any given item of current knowledge is related to mankind's
knowledge as accumulated throughout the ages. Of course, because
of division of labor, specialization, and man's limitations and
bounded rationality, all that was required for an item of new
knowledge to exist did not and could not exist in any one person's
mind. It is likely that the discoverer of some specific new
knowledge has no personal knowledge of much of the great totality
of knowledge, nor of all the connections required that his grasp
of the new knowledge depends upon. However, it requires that the
total knowledge that makes possible the next tier of advancement
existed somewhere at some time in men's minds.

A particular datum of
knowledge rests on a previous total that has been discovered, and
on all the connections of knowledge that were required for that
one item to be apprehended by a person. The web of knowledge
interrelationships is not just at a particular time but exists in
a hierarchical manner across the centuries. For a man to
understand a new piece of knowledge implies all the knowledge that
mankind had to attain in order to get the new bit of knowledge.

Various disciplines
analyze and explore different regions of reality. However, after a
phenomenon is analyzed and dissected into its component elements,
there remains the need for it to be reconstituted back into the
totality that is the universe. It is important to have sense of
how each specific discipline fits into the whole.

Statesman and Theorist

Turgot's first writing on economics came in 1749 in his Letter to
the Abbé de Cicé in which he attacked the inflationary doctrines
of Scottish financier, John Law, who had moved to France. In it,
Turgot took a metallist stance defending gold against the view that it
was possible to replace metallic money with paper credit. In 1753, he
wrote letters advocating the toleration of Protestants in France.
Then, during 1755-1756, he traveled with free trade and free
competition advocate and physiocrat Vincent de Gournay. In 1759, he
wrote an Elegy for Gournay explaining why it is impossible for
government bureaucrats to direct an economy. Then, in 1761, Turgot was
appointed intendant for Limoges, a poor region of France. At this
point, Turgot's intellectual and practical interests turned almost
exclusively in the direction of economic thought and practice.
However, his later economic work, as a civil servant and statesman,
occurs in the context of, and continues to develop, his theories of
history and social development.

"Turgot was for the freedom of domestic and
foreign trade and against mercantilist regulation, forced
cartelization, and special privileges conferred by the government."

Turgot blamed much of the economic decline of Limoges on
high taxation of the peasants there. Therefore, he wanted to
make taxation more equitably based. The taille was
based upon the tax collector's personal estimate of a
person's ability to pay – many aristocrats and clergy were
exempt from this tax leaving the tax burden on the peasants.
Unfortunately, Turgot was unable to abolish the taille.
However, he was able to eradicate the corvée which
consisted of unpaid forced labor on the royal roads. He was
able to replace this forced labor obligation with the paid
labor of proper workers, engineers, and contractors who
built and improved roads and drainage.

Serving as intendant of
the district of Limoges from 1761-1774, Turgot was able to
turn Limoges into one of the more prosperous districts in
France. During this time period, he was able to do much more
than to eliminate compulsory labor for public work. He took
many additional measures to save Limoges from widespread
famine. Among the many problems he faced there were: the
unequal incidence of the tax burden, unproductive
agriculture, scarcity, sporadic famine, restricted markets,
inadequate poor relief, poor roads, problems in transporting
troops, inadequate schools, inefficient gathering of
statistics, and so on.

Turgot introduced new
crops and new agricultural methods for cultivation and
storage. In addition, he established agricultural and
veterinary schools as a way to improve the quality of labor
in the district. He also reduced tariffs, promoted local
free trade, especially in corn, and used government funds in
the form of loans to grain markets in order to promote
imports into Limoges. Furthermore, Turgot instituted a
better relief system for the poor. Not only did he provide
work for the poor, he also reduced their taxes, established
emergency burdens on the rich, and placed special
restrictions on landowners.

In 1766 Turgot drew up a
list of questions on economics for two Chinese students whom
the Jesuits had sent to study in Paris. To help instruct
them in understanding his interrogations, he put his ideas
on paper. These 53 pages became his Reflections on the
Foundations and Distribution of Riches and included the
following themes: the division of labor, the origin and use
of money, the improvement of agriculture, the nature of
capital and the different modes of its employment, the
legitimacy of interest and loans, and revenue from land.
Then, in 1769, he wrote Value and Money which
developed an Austrian type theory beginning with Crusoe
economics and moving to two person exchange, to four person
exchange, and finally to a competitive market economy.

Turgot had a second
opportunity to put free market reforms into practice when he
served as France's Minister of Finance from 1774-1776. He
courageously attempted to save the French monarchy from
economic disaster by keeping government spending in check
and by encouraging private economic enterprise. Turgot
sought a lessening of state activity in many areas. The
French government had been running a deficit for years and
was close to bankruptcy as a type of welfare state for
various privileged and entrenched interests that obstructed
change. He wanted to return the country to solvency by
reducing expenditures and increasing tax revenue. Turgot
expected free markets to bring about increased production
leading to lower prices for consumers and to a greater
source of tax revenue for the state. He told Louis XVI to
cut government spending and to make taxes more equitable or
there would be a danger of revolution. As
Comptroller-General, Turgot adopted the slogan "No
Bankruptcy, No Increase in Taxes, No Loans."

Turgot was concerned with
failure in various markets including those in corn, labor,
and land rents. He also observed administrative chaos and
the proliferation of self-serving local authorities in the
form of bureaus, agencies, boards, courts, and councils.
There was also rampant corruption among government
officials. In addition, he saw the need for practical
political education of France's citizens. Turgot also looked
disapprovingly upon the guild system, a carryover from
medieval times, which prevented workers from entering
certain occupations without permission much like
contemporary occupational licensing.

To a great extent, as
Finance Minister, Turgot tried to institute on a larger
scale the reforms he introduced at Limoges. His highest
priority was to establish freedom of the grain industry in
all of France as he had done in Limoges. He said that
maintaining free trade in corn is the best way to prevent
scarcity in European nations. Turgot opposed strongly
government intervention in the corn trade. During 1775 he
attempted to reform the taille – a tax abuse that
weighed more heavily on the poor. In 1775, he was able to
gain enough support to have the controls lifted on the
internal trade of grain thus restoring the free circulation
of grains sold within France. He also wanted to abolish laws
restricting the wine industry. The next year Turgot, in one
of his Six Edicts of 1776, officially removed the controls
on the prices and transportation of grain, flour, and bread.
It was with these Six Edicts that he attempted to transform
and refashion the traditional monarchy of France.

A second of these edicts
called for the eventual abolition of guilds which
monopolized various trades. There remained only a few
exceptions. Turgot viewed work as a creative act and as a
key instrument of freedom. To shackle work with restrictions
was to violate the right to liberty and to stifle the
possibility of change. The guild system involved the use of
close corporations which represented the various trades – no
one could exercise such trades without going through a long
list of formalities. Turgot insisted that these corporations
be suppressed except in a few industries.

In another important
edict Turgot abolished the corvée thus furthering the
freedom of work. He ended the government's policy of
conscripting labor yearly to construct and maintain roads
and replaced it with a more efficient tax in money. It had
been the practice of the royal department of roads and
buildings to conscript the labor of peasants and farm
workers, without the payment of wages, in building and
repairing the royal highways. Turgot intended, in place of
the corvée, to employ a trained road-building force
and to pay their wages through a moderate tax increase. Road
construction and repair, along with the transportation of
military stores, were to be transferred to the supervision
of proper engineers. In addition, France was to have
transportation of military provisions well-guarded.

The last three of the six
Edicts were of little consequence and dealt with the
discharge of government officials who imposed restrictions
on ports and docks, abolishing tax on the cattle and meat
industries and cutting the tax on suet (i.e., hard animal
fat). Unfortunately, the nobility and the upper classes
undermined Turgot and his Six Edicts. He ran into
insurmountable opposition on the part of nobles, the clergy,
and the Parliament of Paris and was dismissed from his
position.

Turgot was a clearly
articulated defender of individual and economic freedom who
realized that interference with freedom can have systemic
effects. He observed that conditions in various markets are
interrelated through a reciprocal interdependence. He
understood the complex interrelations of the ingredients of
land, labor, capital, wages, production, consumption, and so
on in the economy. He had a grand conception of an open and
dynamic society. He said that government should be limited
to protecting individuals against injustices and the nation
against invasion. Turgot realized that free commerce was the
best protection against scarcity. He wanted to abolish
crushing taxes, trade restrictions, monopoly privileges, and
forced labor and to reduce government expenditures and
public debt. Turgot was opposed to military conscription and
protectionism. Although he desired freedom in foreign
commerce, he was most interested in eliminating restrictions
on France's internal trade. For example, he wanted to
introduce banking and taxation reforms. Turgot also wanted
to create a scientific system of weights and measures.

During his two years as
Minister of Finance, Turgot proposed a gradual progress of
deregulation that put trust in the operation of the open
market. His goal was to have general liberty in buying and
selling. Moderation and gradualism were his form of tactics.
His main efforts were to prepare the public for, and to
institute, reasonable and incremental reforms.

Turgot wanted to see
local self-government in France and ultimately a
constitutional government of the nation. He desired
political liberty and favored constitutional limits on royal
power as well as strong regional governments. Turgot
therefore proposed a hierarchy of elected assemblies going
from the village up to the national level. Although he was
sympathetic to American rebels, he himself would not
recommend that they go to war. He also warned Americans that
slavery is not in accord with a proper political
constitution. Turgot also cautioned America about the danger
of possible civil war.

Political Economy

Although Turgot was familiar with, and close to, the
Physiocrats with respect to their views on economics, he
goes further than they do and in a different direction. Like
the physiocrats, he promoted free trade and advocated a
single tax on the net product of land. He wanted taxes to be
shifted back to agriculture. Turgot agrees with the
physiocrats that, because ultimately only agriculture is
productive, there should be a single tax on land. Taxation
of land was thus the only proper source of revenue for the
state. He saw land as a unique form of wealth and presented
an early view of the law of diminishing returns in
agriculture. Turgot's ultimate goal was actually to
eliminate taxes. Not a full-fledged physiocrat, he was more
interested in abolishing taxes than exacting them on
agricultural land. However, as long as taxation was a
reality, his "ideal" in taxation would be a single
imposition levied only on land. Turgot recommended taxing
only the landowners and not the tenants.

In his writings on
progress, Turgot had analyzed the relationship between
agrarian and industrial organizations. He explained that the
development of commercial capital activates growth both in
the involved industries and in agriculture. According to
Turgot, industry yields a surplus that creates a demand, not
only for crafts and products created through new technology,
but also for products of the soil.

According to Turgot, each
person compares various economic goods, values them, forms
ordinal preference scales, and then chooses among them. He
does this while considering his present and future wants and
needs and the potential uses of the different economic
objects. Turgot saw that these values were subjective (i.e.,
personal) and not able to be measured in any way except
ordinally. Explaining the mutual benefits of free exchange,
Turgot states that exchange increases the wealth of both
parties. He also notes that each transactor wants to gain as
much as possible and to surrender as little as possible in a
given exchange. Like the much later F. A. Hayek, Turgot
spoke of the essential particular knowledge of subjective
individual actors who tend to act in their perceived
self-interest.

Turgot observed that the
subjective utility of an economic good decreases as its
supply to an individual increases – diminishing utility is a
function of abundance. A forerunner of the Marginalist
Revolution, Turgot conceived of the idea of diminishing
marginal productivity of factor inputs. Increasing the
quantity of some factors increases the marginal productivity
until a maximum point is attained. Past this point, the
marginal productivity will decrease, fall to zero, and
ultimately will turn negative. Each increase in input would
be less and less productive. Essentially, all that Turgot
lacked was the idea of the marginal unit.

Concerned with the
classical political economy of scarcity, Turgot saw
economics as the allocation of scarce resources to a number
of alternative ends. He understood that all costs are
opportunity costs because in choosing to employ resources in
one way a person has to give up using specific resources in
some other productive manner. Turgot views the
capitalist-entrepreneur as desiring to earn his imputed
salary plus the opportunity cost (today we would say lost
contribution margin) that he gave up by not investing his
money somewhere else.

Turgot observed that
natural resources must be converted to economic products
through the application of human labor and that production
takes time to take place. He thus recognized the critical
role of time in the production process. In addition, he
noted that capital in advance is essential to the production
process. The act of waiting, which is necessary in modern
production processes, must be rewarded by a return to the
suppliers of capital. This return is, at the minimum, equal
to the market rate of interest on the capital invested in
the company.

While products are being
worked on, there must be advance payments to laborers, who,
Turgot explains, are agreeable to paying the capitalists a
discount out of production in order to be paid money in
advance of the uncertain future revenues. He says that
capital advances are essential in all productive
enterprises. The interest return on investments can be
viewed as the price labor pays to capitalist-entrepreneurs
for advancing savings in the form of current money. Turgot
emphasized that the time element in production is a function
of the use of capital-intensive production methods, the
division of labor, and the demand for capital. He
apportioned the return to the capitalists into pure
interest, depreciation, and entrepreneurial payment that
includes a risk premium.

Turgot recognized that
capital was required for economic growth and that the only
way to amass capital was for individuals not to consume
everything that they had produced. He illuminated the
meaning of the term "surplus" and explained the link between
surplus and economic growth and progress. Turgot observed
that a prosperous economy depends upon the free flow of
capital – capital promotes economic activity. The greater
the amount of saving, the excess of income over consumption,
the higher the accumulation of capital will be. Savings are
accumulated in the form of money and then are invested in
capital goods. He explains that the advance of savings to
the factors of production is the essence of investment.

Turgot's savings and
capital formation analysis is one of his greatest
contributions in economics and it became the basis for the
19th century classical theory of savings and investment. He
demonstrated clearly the benefit of a policy of capital
accumulation and explained that money was essential to the
process of accumulating capital and generating economic
growth. Money was the required ingredient for transferring
savings into investment. Although the surplus accumulated
via savings could be held in commodities or in money, Turgot
explained that economic society languished before the
arrival of metallic money because of the extreme difficulty
of aggregating and transforming surplus production into
capital. Money allowed people to more easily accumulate and
employ their savings.

Money is also a commodity
and is not merely a conventional symbol. Turgot explains
that it is a form of wealth and has value in itself.
Metallic money is more than a sign of value. He said that
gold and silver are money by the nature of things and that
precious metals are one of the forms of capital. For him,
money was intrinsically valuable in the form of gold and
silver. He explained that money had to be a commodity having
intrinsic value for it to be useful as a medium of exchange.
Turgot was against the perspective that the government could
effectively issue paper money as a substitute for metallic
money. His favored order is one in which metallic money,
representing savings, is loaned to borrowers. Savings, in
the form of money, are loaned to entrepreneurs who desire to
invest. This money is channeled through moneylenders as
intermediaries. Some people earn interest income from loans
made to farmers, landowners, merchants, and industrialists.
Such financiers promoted the circulation of capital. Money
is vital for transferring savings into investments.

Interest, the price of
borrowed money, is determined by the supply and demand for
capital and is not immoral. To lend and borrow is the result
of a voluntary contract by two parties, each of whom hoped
to gain from the transaction. Turgot recognized that a loan
is a reciprocal contract between two parties because each
believed that it is advantageous to him. Because there exist
no exploitation in charging interest, Turgot says that usury
laws have been refuted.

Turgot understood that
the explanation for interest is time preference – the
phenomenon of discounting the future and of setting a
premium upon the present. He explains that the present
market value of a capital asset tends to equal the aggregate
of the expected annual future returns from it discounted by
the market rate of interest (or time preference). Turgot
also emphasized that an entrepreneur's expected profits must
exceed the loan rate of interest in order for a loan to have
taken place – he saw the relationship between the profit
rate and the interest rate.

Turgot asserted that the
rate of interest was determined in the market via exchange.
He perceived the relationship between the interest rate and
the quantity of money. More specifically, he observed the
interrelationship among the supply and demand for money and
people's time preferences which come together to affect the
relative amounts of spending and saving and the interest
rate. Turgot saw that a decrease in thrift would raise
interest rates and vice versa. He explained that a low
interest rate is a function of a high savings rate and that
a low interest rate propels the economy to high rates of
economic growth. Turgot noted that a change in the rate of
accumulated savings affects the interest rate which changes
the allocation of resources in the economy. He also talked
about the difference between the natural rate of interest
that would occur in a free economy and the actual interest
on loans (i.e., the difference between the real and nominal
rates of interest). Similarly, he distinguished between a
product's natural price and its market price.

Turgot said that money
can be employed to: (1) purchase land for cultivation or to
lease to farmers; (2) invest in industry by acquiring
buildings, materials, and tools for manufacturing; (3)
invest in agriculture by renting land and purchasing stock
and implements for agricultural entrepreneurship; (4) invest
in trade by buying finished goods and other requirements for
commercial activities; and (5) lend money to others for the
above purposes. According to Turgot, all these activities
either directly or indirectly return money to the circular
flow – there are no leakages. His analysis of savings and
investment thus foretells classical analysis which denies
the possibility of leakage from the exchange process and,
therefore, the possibility of a general glut of products. It
is clear that Turgot anticipated J.B. Say's Law of Markets.

Turgot was for the
freedom of domestic and foreign trade and against
mercantilist regulation, forced cartelization, and special
privileges conferred by the government. He said that
regulation involves expenses that become a tax on products –
the result is overcharging domestic customers and
discouraging foreign purchasers. He wanted sound money and
warned against the dangers of fiat paper money. Turgot also
explained that individual self-interest moves society
forward and is in accord with the general interest. He also
anticipated the diminishing marginal utility theory of Carl
Menger and others. Turgot explained that a person can only
pay taxes by reducing consumption and that there was no
logical basis for levying different rates on different
products. He, like the physiocrats, believed that the strain
of taxation should fall only on the owners of land because
of the very nature of the world. Turgot was a low-interest
advocate who contended that money was the foundation of
capital. He saw savings as a real phenomenon that facilitates
greater investment in the economy. For a busy man of affairs
who found little time to devote to economics, he certainly
has made some monumental contributions in that field.